Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Posts Tagged ‘why is dollar declining in value’

UN Calls for New Global Currency in Place of Greenback

Posted by Larry Doyle on September 9th, 2009 11:04 AM |

What drove the U.S. dollar dramatically lower yesterday? How about a communique from none other than the United Nations Conference on Trade and Development. UNCTAD recently released a statement in which it proclaims:

Given the prevailing major shortcomings in the international financial and monetary system, UNCTAD draws attention to some elements of reform of the international financial architecture, which is long overdue. These include effective capital account management, strengthening the role of special drawing rights (LD’s highlight), and a multilaterally agreed framework for exchange rate management. These reforms imply a fundamental rethinking of global financial governance to stabilize trade and financial relations by reducing the potential for gains from speculative capital flows. This will reduce the likelihood of similar crises in the future and help create a stable macroeconomic environment conducive to growth and smooth structural change in developing countries.

I purposely highlight the UN’s desire to strengthen the role of special drawing rights. In layman’s terms, that means the UN wants to promote the currency of the IMF at the expense of the U.S. dollar.

When BRIC nations promote a move away from the U.S. dollar, one may view it as the competitive nature of international trade. When an entity such as the United Nations is also promoting a move away from the U.S. dollar as the international reserve currency, we are embarking on an entirely new slope along our economic landscape.

The fact that we have heard little to nothing from our power base in Washington leads me to believe that Obama, Geithner, Bernanke, Summers, et al are comfortable with a decline in the value of our currency.

In my opinion, that comfort can be a very dangerous long term maneuver. How so? Economic growth requires capital. If investors deem our currency to be weakening, the capital will flow elsewhere . . . and elements of our quality of life may go right along with it.


London Calling: LIBOR Revisited and The Greenback

Posted by Larry Doyle on May 24th, 2009 8:27 AM |

The biggest developments in the market and economy this week were the decline in the value of our greenback and the move higher in long term interest rates (10yr U.S. government bonds moved to 3.46%, a level not seen since last Fall).

Despite these concerns, many analysts will point to the drop in Libor (London interbank overnight rate) as an indication of the increased confidence in the global banking system. I strongly disagree.

I believe the drop in Libor is not a reflection of the “fundamental” improvement in our global banking system, but rather a “technical” reflection of the supply of dollars that have been injected into the global economy. There is an enormous difference in these lines of reasoning and the implications they have for our markets and economy going forward.

If Libor were declining because of a “fundamental” improvement in the global banking system, it would be reflected in an increased flow of credit into the economy. That flow is not happening.

If Libor is declining because of a “technical” supply of  dollars, then it would be reflected in a decline in the value of the dollar, an increase in long term interest rates, an increase in the prices of select commodities (gold has rebounded to $957/oz, oil is back above $60/barrel), and other inflation-related variables. Yes, we are seeing all of these developments.

Let’s revisit my post from May 15th, What Is Going On With Libor?    

While many analysts were promoting the drop in Libor as a positive, I begged to differ and wrote:

Has the drop in Libor coincided with an improvement in the credit markets? No. Despite what pundits would tell you, credit spreads remain at elevated levels. In fact, on an inflation adjusted basis, rates are at the highest levels since the early 1980s. 

Why aren’t banks lending as much? Lack of confidence in the economy along with enormous embedded losses in their current book of loans. Those losses are real and will be rising. The elusiveness of bank credit is highlighted in a McClatchy article, Businesses Struggle as Bank Loans Remain Elusive, in the Newsworthy section of Sense on Cents.  

Thus, if a drop in Libor is not a reflection of improved credit conditions, what does it mean?

In my opinion, it is a precursor to a drop in the value of the dollar. Why?

Very simply, too many greenbacks floating around.  A decline in the value of the dollar is inflationary. Both core rates of producer prices and consumer prices reported this week were higher than expected. I’ll be watching.

Please recall, there are always three factors that determine the level of a market: fundamental, technical, psychological. A move in Libor is almost always analyzed from a fundamental standpoint. However, in our Uncle Sam economy, we need to be increasingly diligent in reviewing all three of the aforementioned factors along with the implications they have for our global markets as we navigate the economic landscape.


P.S.  In light of the Memorial Day holiday, I will not be hosting NQR’s Sense on Cents with Larry Doyle this evening.  I look forward to getting back at it next week. If you have any questions or topics you would like addressed, please do not hesitate to leave them and I will respond. Enjoy!! LD

Recent Posts